Tax Laws Amendment (2008 Measures No. 4) Act 2008 (97 of 2008)

Schedule 1 Demutualisation of private health insurers

Income Tax Assessment Act 1997

11 After Part 3-30

Insert:

Part 3-32 - Co-operatives and mutual entities

Division 315 Demutualisation of private health insurers

Table of Subdivisions

Guide to Division 315

315-A Capital gains and losses connected with a demutualisation of a private health insurer to be disregarded

315-B Cost base of certain shares and rights in private health insurers

315-C Lost policy holders trust

315-D Special cost base rules for certain shares and rights in holding companies

315-E Special CGT rule for legal personal representatives and beneficiaries

315-F Non-CGT consequences of demutualisation

Guide to Division 315

315-1 What this Division is about

This Division sets out the taxation consequences of the demutualisation of private health insurers.

Policy holders, demutualising health insurers and certain other entities can disregard capital gains and losses arising under a demutualisation (see Subdivision 315-A).

Shares and rights issued under the demutualisation are given a cost base based on the market value of the demutualising health insurer at the time of issue (see Subdivisions 315-B and 315-D).

Assets held by a lost policy holders trust are given roll-over relief if transferred to the lost policy holder, or if the lost policy holder becomes absolutely entitled to them. Otherwise the trustee of the lost policy holders trust is taxed on any capital gains (see Subdivision 315-C).

A legal personal representative can disregard capital gains and losses made when passing an asset to a beneficiary of a policy holder's estate (see Subdivision 315-E).

Shares, rights or cash received under a demutualisation are not assessable income and not exempt income (see Subdivision 315-F).

Subdivision 315-A - Capital gains and losses connected with a demutualisation of a private health insurer to be disregarded

Table of sections

Rules for policy holders

315-5 Policy holders to disregard capital gains and losses related to demutualisation of private health insurer

315-10 Effect on the legal personal representative or beneficiary

315-15 Demutualisations to which this Division applies

315-20 What assets are covered

Rules for demutualising health insurer

315-25 Demutualising health insurers to disregard capital gains and losses related to demutualisation

Rules for other entities

315-30 Other entities to disregard capital gains and losses related to demutualisation

Rules for policy holders

315-5 Policy holders to disregard capital gains and losses related to demutualisation of private health insurer

Disregard a *capital gain or *capital loss of an individual from a *CGT event that happens in relation to a *CGT asset if:

(a) the CGT event happens under a demutualisation to which this Division applies; and

(b) the individual is, or has been, a policy holder (within the meaning of the Private Health Insurance Act 2007) of, or another person insured through, the demutualising entity (the demutualising health insurer ); and

315-10 Effect on the legal personal representative or beneficiary

Disregard a *capital gain or *capital loss of an entity from a *CGT event that happens in relation to a *CGT asset if:

(a) the CGT asset forms part of the estate of a deceased individual who is mentioned in paragraph 315-5(b); and

(b) the entity is the deceased individual's *legal personal representative or a beneficiary in the deceased individual's estate; and

(d) the CGT event happens under a demutualisation to which this Division applies; and

(e) the CGT asset is covered by section 315-20.

315-15 Demutualisations to which this Division applies

This Division applies to a demutualisation of an entity if:

(a) the entity:

(i) is an entity to which item 6.3 of the table in section 50-30 applies; and

(ii) is not registered under Part 3 of the Life Insurance Act 1995; and

(iii) does not have capital divided into shares; and

Note: Item 6.3 of the table in section 50-30 applies to a private health insurer within the meaning of the Private Health Insurance Act 2007 that is not carried on for the profit or gain of its individual members.

(b) an application by the entity to convert to being registered as a for profit insurer (within the meaning of the Private Health Insurance Act 2007) is approved under subsection 126-42(5) of that Act; and

(c) consistently with the conversion scheme mentioned in paragraph 126-42(2)(b) of that Act, the entity becomes registered as a for profit insurer (within the meaning of that Act).

315-20 What assets are covered

These *CGT assets are covered:

(a) an interest in the demutualising health insurer as a policy holder;

(b) a membership interest in the demutualising health insurer;

(d) a right or interest of another kind that arises under the demutualisation.

Rules for demutualising health insurer

315-25 Demutualising health insurers to disregard capital gains and losses related to demutualisation

Disregard a *capital gain or *capital loss of an entity from a *CGT event if:

(a) the CGT event happened under a demutualisation to which this Division applies; and

(b) the entity is the demutualising health insurer.

Rules for other entities

315-30 Other entities to disregard capital gains and losses related to demutualisation

Disregard a *capital gain or *capital loss of an entity from a *CGT event if:

(a) the entity is established solely for the purpose of participating in a demutualisation to which this Division applies; and

(b) the entity is not a trust covered by Subdivision 315-C (about lost policy holders); and

(i) happened under a demutualisation to which this Division applies; and

(ii) happened before or at the same time as the allocation or distribution (in the form of shares or cash) of the accumulated surplus of the demutualising health insurer; and

(iii) was connected to that allocation or distribution.

Note: The allocation or distribution of the accumulated surplus could happen through an arrangement involving more than one transaction.

Subdivision 315-B - Cost base of certain shares and rights in private health insurers

Table of sections

315-80 Cost base and acquisition time of demutualisation assets

315-85 Demutualisation asset

315-90 Participating policy holders

315-80 Cost base and acquisition time of demutualisation assets

Cost base adjustment

(1) The first element of the *cost base and *reduced cost base of a *CGT asset is its *market value on the day it is issued if:

(a) the asset is covered by section 315-85 (a demutualisation asset ); and

(b) the asset is issued to an entity (a participating policy holder ) covered by section 315-90.

Note: There is an exception to this rule in Subdivision 315-D where the asset is a share or right in a holding company with other assets.

Acquisition rule

(2) The participating policy holder is taken to have *acquired the demutualisation asset at the time it is issued.

315-85 Demutualisation asset

(1) This section covers an asset if:

(a) the asset is:

(i) a share in the demutualising health insurer; or

(ii) a right to *acquire a share in the demutualising health insurer; or

(iii) a share in an entity that owns all of the shares in the demutualising health insurer; or

(iv) a right to acquire a share in an entity mentioned in subparagraph (iii); and

(b) the share or right is issued under a demutualisation to which this Division applies; and

(i) the variation or abrogation of rights attaching to or consisting of a *CGT asset covered by section 315-20; or

(ii) the conversion, cancellation, extinguishment or redemption of such a CGT asset.

Exclusion for rights with an exercise price

(2) Despite subsection (1), this section does not cover a right to *acquire a share in an entity if the holder of the right must pay an amount to exercise the right.

Exclusion where assets not issued simultaneously

(3) Despite subsection (1), an asset is not covered by this section unless all of the assets covered by subsection (1) for the demutualisation in question are issued:

(a) at the same time; and

(b) to an entity that is either:

(i) a participating policy holder (see section 315-90); or

(ii) the trustee of a trust covered by Subdivision 315-C (about the lost policy holders trust).

315-90 Participating policy holders

(1) This section covers an individual who:

(a) is, or has been, a policy holder (within the meaning of the Private Health Insurance Act 2007) of, or another person insured through, the demutualising health insurer; and

(b) is entitled, under the demutualisation, to an allocation of demutualisation assets.

(2) This section also covers an entity who became entitled to an allocation of demutualisation assets because of the death of an individual mentioned in subsection (1).

Subdivision 315-C - Lost policy holders trust

Table of sections

315-140 Lost policy holders trust

315-145 CGT treatment of demutualisation assets in lost policy holders trust

315-150 Roll-over where assets transferred to lost policy holder

315-155 Trustee assessed if assets dealt with not for benefit of lost policy holder

315-160 Subdivision 126-E does not apply to lost policy holders trust

315-140 Lost policy holders trust

This Subdivision covers a trust (a lost policy holders trust ) in relation to a demutualisation to which this Division applies if:

(a) the conversion scheme mentioned in paragraph 126-42(2)(b) of the Private Health Insurance Act 2007 for the demutualisation provides for the trust; and

(b) under the demutualisation, demutualisation assets (see section 315-85) are issued to the trustee of the trust; and

(i) individuals ( lost policy holders ) who are, or have been, policy holders (within the meaning of the Private Health Insurance Act 2007) of, or other persons insured through, the demutualising health insurer; or

(ii) if the lost policy holder has died - the *legal personal representative of the lost policy holder or a beneficiary in the estate of the lost policy holder.

Example: An example of an individual on whose behalf the trust might hold assets would be an individual who has not completed a formal step required for them to be issued with demutualisation assets directly. Another example might be an individual living overseas.

315-145 CGT treatment of demutualisation assets in lost policy holders trust

Cost base adjustment

(1) The first element of the *cost base and *reduced cost base of a demutualisation asset issued to the trustee of a lost policy holders trust is its *market value on the day it is issued.

Note: There is an exception to this rule in Subdivision 315-D where the asset is a share or right in a holding company with other assets.

Acquisition rule

(2) The trustee is taken to have *acquired the demutualisation asset at the time it is issued.

315-150 Roll-over where assets transferred to lost policy holder

(1) This section applies in relation to a *CGT event if:

(a) the CGT event happens in relation to an asset held by the trustee of a lost policy holders trust on behalf of a lost policy holder; and

(b) the CGT event happens because the lost policy holder (or, if the lost policy holder has died, the *legal personal representative of the lost policy holder or a beneficiary in the estate of the lost policy holder) either:

(i) is transferred the asset by the trustee; or

(ii) becomes absolutely entitled to the asset.

Note: The asset may be a demutualisation asset, or some other asset.

Consequence for trustee

(2) Disregard a *capital gain or *capital loss the trustee makes from the *CGT event.

Consequence for lost policy holder

(3) The *cost base of the asset in the hands of the trustee of the lost policy holders trust just before the *CGT event becomes the first element of the cost base and *reduced cost base of the asset in the hands of the lost policy holder, *legal personal representative or beneficiary.

(4) The lost policy holder, *legal personal representative or beneficiary is taken to have *acquired the asset when the trustee of the lost policy holders trust acquired it.

315-155 Trustee assessed if assets dealt with not for benefit of lost policy holder

(1) This section applies in relation to a *capital gain from a *CGT event if:

(a) the CGT event happens in relation to an asset held by the trustee of a lost policy holders trust; and

(b) section 315-150 does not apply to the CGT event.

(2) If this section applies:

(a) for the purposes of sections 97, 98A and 100 of the Income Tax Assessment Act 1936, the share of the net income of the trust that is attributable to the *capital gain is taken not to be included in the assessable income of a beneficiary of the trust; and

(b) the trustee is not assessed, and is not liable to pay tax, in respect of the share under section 98 of the Income Tax Assessment Act 1936.

Note: Because of these consequences in relation to sections 97 and 98 of the Income Tax Assessment Act 1936, the trustee will be assessed on the beneficiary's share under section 99A of that Act.

315-160 Subdivision 126-E does not apply to lost policy holders trust

Subdivision 126-E does not apply in relation to a demutualisation to which this Division applies.

Subdivision 315-D - Special cost base rules for certain shares and rights in holding companies

Table of sections

315-210 Cost base for shares and rights in certain holding companies

315-210 Cost base for shares and rights in certain holding companies

(1) This section applies in relation to a *CGT asset that is a demutualisation asset if:

(a) the demutualisation asset is:

(i) a share in an entity mentioned in subparagraph 315-85(1)(a)(iii); or

(ii) a right to *acquire a share in an entity mentioned in that subparagraph; and

(b) the entity owns other assets in addition to the shares in the demutualising health insurer; and

This section applies despite sections 315-80 and 315-145.

Cost base adjustment

(2) The first element of the *cost base and *reduced cost base of the *CGT asset is worked out under the method statement.

Method statement

Step 1. Start with the *market value of the demutualising health insurer on the day the asset is issued.

Step 2. Divide the result of step 1 by the sum of:

(a) the number of shares in the entity that are issued under the demutualisation; and

(b) the number of shares in the entity that can be *acquired under rights that are demutualisation assets issued under the demutualisation.

Step 3. The result of step 2 is the first element of the *cost base and *reduced cost base of the asset, unless the asset is a right.

Step 4. If the asset is a right, multiply the result of step 2 by the number of shares that can be *acquired under the right. The result is the first element of the *cost base and *reduced cost base of the asset.

Example: Wellbeing Health demutualises on 1 April 2008 and has a market value of $400 million on that day. It distributes its accumulated mutual surplus in the form of rights to acquire shares in its holding company Healthiness Insurance Ltd (Healthiness). The rights do not have an exercise price.

A total of 800 million shares can be acquired in Healthiness under rights issued under the demutualisation. Each right allows the holder to acquire 50 shares. No shares in Healthiness are issued.

Under the method statement, the first element of the cost base and reduced cost base of each right is worked out by dividing the market value of Wellbeing Health (step 1) by the number of shares in Healthiness that can be acquired under the demutualisation (step 2) and multiplying the result by the number of shares that can be acquired under the right (step 4):

($400 million / 800 million) x 50 = $25

Acquisition rule

(3) The participating policy holder or trustee is taken to have *acquired the *CGT asset at the time it is issued.

Subdivision 315-E - Special CGT rule for legal personal representatives and beneficiaries

Table of sections

315-260 Special CGT rule for legal personal representatives and beneficiaries

315-260 Special CGT rule for legal personal representatives and beneficiaries

(1) This section sets out what happens if a *CGT asset:

(a) is a demutualisation asset; and

(b) forms part of the estate of a participating policy holder mentioned in subsection 315-90(1) who has died, but was not owned by the policy holder just before dying; and

(c) *passes to a beneficiary in the policy holder's estate because the asset is transferred to the beneficiary by the policy holder's *legal personal representative.

Note: Division 128 deals with the effect of death in relation to CGT assets a person owns just before dying.

(2) Disregard a *capital gain or *capital loss the *legal personal representative makes if the asset *passes to a beneficiary in the policy holder's estate.

Consequence for beneficiary

(3) The *cost base and *reduced cost base of the asset in the hands of the *legal personal representative just before the asset *passes to the beneficiary becomes the first element of the cost base and reduced cost base of the asset in the hands of the beneficiary.

(4) The beneficiary is taken to have *acquired the asset when the *legal personal representative acquired it.

Subdivision 315-F - Non-CGT consequences of demutualisation

Table of sections

315-310 General taxation consequences of issue of demutualisation assets etc.

315-310 General taxation consequences of issue of demutualisation assets etc.

(1) An amount of *ordinary income or *statutory income of an entity to which subsection (2) applies is not assessable and not *exempt income if:

(a) the amount would otherwise be included in the ordinary income or statutory income of the entity only because a demutualisation asset was issued to the entity; or

(b) the amount is a payment made to the entity, under a demutualisation to which this Division applies, in connection with:

(i) the variation or abrogation of rights attaching to or consisting of a *CGT asset covered by section 315-20; or

(ii) the conversion, cancellation, extinguishment or redemption of such a CGT asset.

(2) This subsection applies to an entity that:

(a) is, or has been, a policy holder (within the meaning of the Private Health Insurance Act 2007) of, or another person insured through, the demutualising health insurer; or

(b) is issued with the demutualisation asset, or receives the payment, because of the death of a policy holder mentioned in paragraph (a).

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